Following a disappointing August, the U.S. economy added a meager 194,000 jobs in September, as a critical shortage of workers hampers the nation's economic growth.
The unemployment rate fell to 4.8 percent from 5.2 percent, the Bureau of Labor Statistics said Friday. Economists had been expecting an increase of 500,000 and an unemployment rate of 5.1 percent.
"This is quite a deflating report," said Nick Bunker, economic research director at Indeed hiring service. "The hope was that August was an anomaly but the fact is, the delta variant was still with us in September. One optimistic interpretation is that Covid-19 case counts are receding, so future months should be stronger. But the reality is that we are still in a pandemic."
One positive in the report was the upward tick in hourly wages, which rose by 0.6 percent, versus estimates of a 0.4 percent increase. Wage growth is a metric on which the market is keeping a sharp eye as it struggles to interpret the noise around skyrocketing prices, supply chain bottlenecks and what, exactly, it means for inflation to be “transitory.”
For most of the pandemic-recession recovery, metrics around earnings and wage growth have been volatile. The dramatic collapse of the leisure and hospitality sector skewed earnings data as millions of low-wage, service-sector workers lost their jobs due to Covid-triggered shutdowns — and some argued that the big miss in August could have been a function of flat leisure and hospitality jobs, which until that point had contributed an average of 350,000 new jobs per month over the past six months.
But even with those gains contributing to the overall recovery in the labor market, average hourly wages have continued to climb. Persistent weakness in the labor force participation rate is a major contributing factor, said Ross Mayfield, an investment strategy analyst at Baird. Since June 2020, labor force participation has remained nearly flat, oscillating from 61.4 percent to 61.7 percent.
“I think one of the main factors that could contribute to higher or elevated wage growth going forward is just tighter supply in the labor market,” he said. “If there are functionally fewer workers, those that remain are in a better position to negotiate wage hikes.”
“Inside manufacturing, companies are 100 percent seeing the need and reacting to the need to raise wages at all levels,” said Ethan Karp, president and CEO of the Manufacturing Advocacy and Growth Network. “They still can't find people no matter what they do.”
And supply pressures are still unrelenting. This makes it difficult, economists say, to tease out exactly how much worker pay is contributing to the inflationary forces that are behind companies raising their prices. “It certainly is a contributing factor, but as far as the items we’re watching for inflation, it still pales in comparison to supply issues and Covid-19 issues,” Mayfield said.
“There definitely are some transitory factors in the inflation we’ve seen. I think a lot of it also has to do with supply chain disruptions,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.
“The supplies are there. It's just a problem of getting them out into the economy,” she said — a function of the worker shortage that has port operators, trucking companies and delivery services all running short-handed.
The worker shortage means companies have been willing to pay more to entice people back into the labor market — and those higher labor costs could stick around.
Paying more to entice those workers back into the labor market — or steal them from competitors — will solve the problem in the short term, but higher labor costs are likelier to stick around than elevated prices for commodities or components, as economists agree that wage gains are “stickier” than price gains. The supply of computer chips or cardboard boxes or crude oil fluctuates with supply, but while employers can raise pay, they generally can’t unilaterally slash wages or salaries — especially not in the current tight labor market.
“The wage inflation is the sticky one — that's the one that’s going to create longer-lasting inflation,” Horneman said.
For the moment, recent productivity gains have given employers a little breathing room, said Harry Holzer, professor of public policy at Georgetown University. “[There] could be some higher productivity that would make it easier for firms to pay these higher wages without inflation,” he said.
Many view this as a good thing, so long as the price pressures that are squeezing American shoppers do, in fact, recede in the coming months. “Some of us hope that inflation will start to moderate as these bottlenecks and supply shortages work their way through, and we’re hoping that these wage increases outlast the price increases,” Holzer said.
“My hope is that wage increases will once and for all outpace inflation, and manufacturing will just be more competitive,” Karp said. “Manufacturers raising wages is a very good thing. It’s good for the industry, it's good for people. It’s what’s needed.”